What he didn't say publicly is that foreigners, among other big institutional investors, had lost confidence in one of the most vital and plain-vanilla U.S. investments. In a sense, they were losing confidence in the world's largest economy, and he needed to reverse matters.

"That's the unstated objective," said Vincent Reinhart, a former chief economist of the Federal Reserve's rate-setting Open Market Committee.

That underscores how interdependent U.S. finance has become with the global marketplace. Although they underwrote much of America's growth in the early 19th century, in more recent times foreigners hadn't been large holders of U.S. agency debt until about 1999, and the trend grew through much of President Bush's term in parallel with the nation's housing boom.

Foreigners hold an estimated 20 percent of Fannie and Freddie debt, commonly called agency debt. Since that debt is backed by U.S. mortgages, keeping foreigners buying this debt is vital if the housing market is to recover.

The long-term securities that Fannie and Freddie offer have long been considered among the safest of investments. That's partly because they enjoyed the implicit support of the U.S. government, which chartered both privately owned profit-seeking businesses. Investors have long believed that the U.S. government wouldn't let the two fail.

In fact, legislation that Bush signed into law July 30 kept Fannie and Freddie in their historical form but allowed the Treasury to provide a financial backstop if necessary.

That was a nod to investors, but it failed to quell fears, thus prompting the weekend's action putting Fannie and Freddie into conservatorship, a form of bankruptcy protection that keeps them intact.

"What they did over the weekend was good for debt holders. The firms will still be there, and there is protection for the debt holders," said Reinhart, a scholar at the American Enterprise Institute, a conservative research center.

The housing crisis contaminated financial markets in August 2007, but it took almost another year before investor doubts about Fannie and Freddie exploded. By July it appeared that foreigners, among others, had lost trust and sold their Fannies and Freddies or refused to buy more.

That amounted to a buyer's strike, even as yields on these bonds were more than double what they'd been a year earlier.

"When foreign governments became noticeably worried about their investments in Fannie Mae and Freddie Mac, there was no choice but for Paulson and the government to act quickly to restore confidence in the U.S. markets," Sen. Charles Schumer, D-N.Y., the chairman of the Joint Economic Committee of Congress, said in a statement to McClatchy.

Interviewed Monday on CNBC, Paulson said he was concerned about foreigners and other investors selling their Fannie and Freddie investments, "no doubt about that."

The most recent numbers available from the Treasury Department date only to June, but by then the trend was clear. China, the biggest foreign holder of agency debt, purchased $14.8 billion in May but just $9.6 billion in June. Japan purchased $4.47 billion in May but bought $770 million in June. Canada purchased almost $2.6 billion in agency debt in May but trimmed it to $208 million in June.

The trend was troubling, because Fannies and Freddies traditionally have been a haven where foreign investors flock when financial markets are volatile. In August 2001, foreign investors purchased about $12 billion in agency debt. In October 2001, the month after 9-11, they purchased $27.2 billion worth.

"I presume that people like (Federal Reserve Chairman) Ben Bernanke have been having serious conversations with central bankers around the world," said Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee.

By this summer, there were signs that foreign investors were bailing out. On Aug. 28, London's Financial Times reported that the Bank of China had sold $4.6 billion in Fannies and Freddies. That same day, the financial news wire Bloomberg reported that Japanese investment funds were selling off their agency debt.

The success of Paulson's takeover may depend on foreigners' willingness to return to purchasing Fannies and Freddies.

"When you look at the big picture, it just hits you between the eyes. You've got $5 trillion in debt and guarantees, and a lot of that is held outside the United States," said Brian Bethune, the chief U.S. economist for forecaster Global Insight in Lexington, Mass.

Bethune likened the unraveling financial situation over the past year to tremors that precede an even bigger earthquake, "and at some point the whole system could melt down. I think that's why they had to move."

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